Mergers and Acquisitions Support

Financial due diligence provides a more detailed understanding of a company's historical financial performance and the factors that may affect its expected results. The analysis goes beyond reviewing reported earnings and may address the composition of revenue and expenses, changes in profitability, working capital requirements, debt and debt-like items, and other financial matters relevant to the transaction.

Effective due diligence can identify financial issues before they become purchase price, negotiation, or post-closing issues. The scope of the analysis depends on the transaction, the client's objectives, and the financial information available.

Buy-Side Financial Due Diligence

We provide buy-side financial due diligence to private equity firms, strategic acquirers, and other buyers seeking to better understand the financial performance of a target company and matters that may affect the economics of the proposed acquisition. Depending on the engagement, our analysis may include historical revenue and profitability trends, quality and sustainability of earnings, revenue composition and gross margins, customer and product concentration, net working capital requirements, debt and debt-like items, capital expenditures and other significant cash requirements, and financial projections and underlying assumptions. Our findings help buyers understand the financial performance underlying the transaction, identify areas requiring further diligence, and evaluate matters that may affect valuation, purchase price, or other transaction terms.

Sell-Side Financial Due Diligence

Sell-side financial due diligence helps business owners and management teams prepare for the financial scrutiny that typically accompanies a sale process. Identifying and addressing financial questions before buyer diligence begins can reduce uncertainty and allow management to present the company's financial performance in a clear and organized manner. Our work focuses on preparing for the issues a prospective buyer is likely to examine. This may include developing and supporting adjusted EBITDA, organizing key financial analyses and schedules, identifying matters that may require explanation or additional support, and evaluating working capital and other transaction considerations before they become part of buyer diligence. A well-prepared financial analysis can help management respond more efficiently to buyer questions, support the financial information presented during the sale process, and reduce the risk that avoidable inconsistencies or incomplete information create unnecessary transaction issues.

Financial due diligence typically proceeds alongside legal, tax, and operational diligence workstreams, often on a compressed timeline driven by the transaction schedule. Coordinating information requests and analysis across these workstreams helps avoid duplicative requests to the target company and allows issues to be identified and addressed while there is still time to reflect them in the transaction.

Financial due diligence generally begins with a request list addressed to the target company, with responsive documents typically organized in a virtual data room. A financial due diligence request list commonly includes:

• Historical financial statements and interim financial statements for the current period
• General ledger detail and trial balances supporting the financial statements
• Accounts receivable and accounts payable aging schedules
• Debt agreements, capital lease schedules, and other financing documents
• Material customer and vendor contracts
• Capitalization tables and equity award schedules
• Federal and state tax returns and any related correspondence

An organized and complete initial response to these requests can meaningfully shorten the diligence timeline. Where information is incomplete or requires clarification, we work directly with the target company's finance team or, on a sell-side engagement, help management anticipate and prepare for these follow-up requests before they are received from a buyer.

Financial due diligence often involves competitively sensitive information, particularly where the counterparty is a strategic buyer that competes with the target company. In these situations, counsel may implement measures such as clean team arrangements or staged information release, and we coordinate our review procedures with counsel to work within these constraints while still completing the financial analysis needed for the transaction.

A quality of earnings analysis focuses on the composition and sustainability of a company's reported earnings. Reported EBITDA or net income may include items that are nonrecurring, unusual, related to owners or related parties, or otherwise not representative of expected ongoing operations.

Our analysis may reconcile reported EBITDA to adjusted EBITDA by evaluating potential adjustments and the financial support for each. We also analyze revenue, margins, customer concentration, and historical earnings trends to understand the factors affecting profitability and the extent to which reported earnings are representative of ongoing operations.

A quality of earnings analysis does not simply seek to increase or decrease reported EBITDA. Adjustments should reflect the underlying financial circumstances and be supported by the available information. The objective is to provide a clearer understanding of the earnings generated by the business and the factors that may affect their sustainability.

For buyers, this analysis can help assess the earnings underlying the transaction and identify factors that may affect valuation or purchase price. For sellers, it can help identify and support potential adjustments before the business is presented to prospective buyers.

Occasionally, financial due diligence identifies matters that go beyond ordinary earnings quality issues, such as indications of a possible misstatement, undisclosed related-party activity, or employee fraud. In these situations, our Forensic Accounting Services experience can help evaluate the nature and extent of the issue and its potential effect on the transaction.

The purchase price stated for a business may not be the amount ultimately paid or received. Net working capital, debt, cash, and other balance-sheet items may result in adjustments to the purchase price and can become significant points of negotiation.

Net Working Capital

We analyze historical working capital to understand the level required to support normal business operations. Depending on the transaction, our analysis may consider historical trends, seasonality, changes in the business, and the composition of individual working capital accounts. Our work may include developing or evaluating a normalized net working capital target. A well-supported target can help distinguish normal working capital requirements from temporary fluctuations and reduce the risk of unexpected adjustments at closing. The net working capital target, commonly called the peg, is often negotiated between the parties and set out in the purchase agreement. Because the peg establishes the baseline against which actual closing net working capital is measured, and any shortfall or excess adjusts the purchase price dollar for dollar, a well-supported analysis of normal working capital levels is important to both buyers and sellers when negotiating this term.

Debt & Debt-Like Items

Debt-like items may include financial obligations that are not classified as traditional funded debt but may nevertheless affect the economics of a transaction. What constitutes a debt-like item depends on the financial characteristics of the obligation and the terms of the transaction. We analyze potentially relevant balance-sheet and other financial items and quantify their effect where appropriate. Counsel determines the interpretation of transaction documents; our role is to analyze the financial treatment and calculations associated with the applicable terms.

An objective valuation can provide an important reference point when evaluating a proposed acquisition, sale, or other transaction. Transaction prices can be influenced by negotiation dynamics, financing, strategic considerations, and the motivations of the parties. An independent valuation provides a financial analysis of value based on the applicable valuation framework rather than beginning with a desired transaction price.

Insight may value an entire business, a business segment, an ownership interest, or other assets involved in a transaction. Depending on the assignment, we analyze historical and expected financial performance, market information, risk, growth, capital requirements, and other factors relevant to value.

Strategic & Financial Buyers

Financial and strategic buyers may evaluate the same business differently based on their investment objectives and the benefits available to them from the acquisition. A financial buyer may generally evaluate the business based on its standalone financial performance and future prospects, while a strategic buyer may also consider potential synergies from combining the target with its existing operations. The relevance of these considerations depends on the purpose of the valuation and applicable standard of value. Where appropriate, we evaluate the perspectives of financial and strategic buyers and distinguish between benefits generally available to market participants and those specific to a particular buyer.

For additional information about our valuation process, see our Business Valuation Services page.

Following an acquisition, companies may require valuation services to support financial reporting and other post-transaction requirements. We assist management teams and their advisors with purchase price allocations and the valuation of acquired intangible assets, providing independent analyses supported by the financial information and transaction-specific facts.

Purchase Price Allocation

A purchase price allocation involves allocating the consideration transferred in an acquisition among the acquired assets and assumed liabilities in accordance with the applicable financial reporting requirements. We analyze the transaction and acquired business, identify the assets requiring valuation, and develop the valuations and supporting analyses needed for the allocation. Our work may include valuation of customer relationships, trade names and trademarks, developed technology, and other identifiable intangible assets, as well as analysis of the remaining goodwill. We work with management, accounting teams, and other advisors throughout the process to address valuation assumptions, supporting information, and questions that may arise during financial reporting or audit review.

Intangible Asset Valuation

Acquisitions frequently involve intangible assets that are not separately recognized on the target company's historical balance sheet but require valuation following the transaction. We value acquired intangible assets based on their expected economic benefits, useful lives, associated risks, and other characteristics relevant to the specific asset. Depending on the acquisition, these assets may include customer relationships, trade names and trademarks, developed technology and software, patents and other intellectual property, and contract-related intangible assets.

For additional information regarding our valuation of intellectual property and other intangible assets, see our Intellectual Property & Intangible Asset Valuation services.

Financial analysis may continue after a transaction closes. Purchase agreements frequently contain mechanisms that adjust the final purchase price based on financial amounts measured at or after closing.

Purchase Price Adjustments and Net Working Capital True-Ups

Following closing, the final purchase price may be subject to adjustment based on closing net working capital, cash, debt, debt-like items, transaction expenses, or other amounts specified in the transaction documents. We calculate or review these adjustments using the closing financial information and applicable transaction terms. Our work may include analyzing individual balance-sheet accounts, evaluating the consistency of accounting treatment, reviewing proposed adjustments, and quantifying differences between the amounts calculated by the parties. Where net working capital is subject to a post-closing true-up, we analyze closing net working capital relative to the agreed target and evaluate the financial components of the resulting adjustment.

Earnout Analysis

Some transactions include contingent consideration based on the acquired company's post-close performance. Earnouts may be tied to revenue, EBITDA, gross profit, or other financial measures. We may calculate or review the applicable financial measures and analyze the underlying accounting information used in the earnout calculation. Where disagreements arise, our forensic accounting experience can also assist in evaluating the financial activity underlying the disputed calculation.

Insight Forensic & Valuation Services can assist throughout the transaction lifecycle, from financial due diligence and valuation through closing calculations and post-close analysis. We work with private equity firms, strategic buyers, business owners, management teams, counsel, investment bankers, lenders, and other transaction advisors based on the needs of the engagement.

M&A transactions can involve significant capital and complex financial considerations. Our role is to provide independent financial and valuation analysis, identify matters that may affect transaction economics, and communicate our findings clearly so clients and their advisors can make informed decisions. Where a transaction becomes disputed, the same analysis supports our litigation support and expert services.